A common topic between Uncles and Aunty’s when they stop by to have a small talk at tea shops, vegetable stores, and at our Kirana Stores is about- Mehengai or the price rise. As often as this topic is discussed, there is no doubt that the general public is mostly aware of inflation. But still, it is not very often that we see people doing something about it.
Even though people know about the concept of Inflation they are seldom involved in making necessary changes in their financial planning to combat the effects of inflation. Not accounting for inflation can chip away major chunks from your income and hence it is very important to not just talk about inflation but do something about it. But firstly, let us try and understand what inflation is actually. Read on to find out more.
What is Inflation?
We have often heard our parents comparing the prices of commodities when they were kids vs. what those commodities price nowadays. Let us take a glance at the price difference of goods then vs. now
|Butter(500gm)||Rs. 6.50||Rs. 245|
|A Flight Ticket from Mumbai to Delhi||Rs. 1500||Rs. 4200|
|Maruti Alto||Rs. 60,000||Rs. 2.5 Lacs|
It is often astonishing to hear that around 47-50 years back goods were available at such prices. Ah, the good old days. Imagine what we could buy at such low prices with our current incomes, but here we are struggling to make ends meet.
These examples can be a perfect example to explain the concept of Inflation, which in simple terms, is the phrase used to describe an increase in the general cost of goods and services or a decline in the purchasing power of a currency.
Prices rise as a currency’s value declines; thus, the same amount can therefore buy fewer goods. If you don’t take the essential steps to plan and protect your hard-earned money, rising prices might compel you to dip into your funds meant for other uses, jeopardizing your long- and short-term goals. And while it should be an important aspect to consider while planning our expenses, it commonly isn’t so.
Even accounting for inflation is insufficient at times. The level of inflation varies from one good or service to another. The leisure and entertainment sector may experience different inflation than the everyday commodities segment. The inflation of educational costs will be different from that of medical and healthcare costs. The road will be particularly difficult for someone who has not taken inflation into account or has only kept one arbitrary estimate of inflation. The purpose is to enhance the prediction process because it is challenging to make informed predictions and account for inflation in all of your goals.
Most people do not consider lifestyle inflation, which is more important, to be a risk. While some people have a conceptual understanding of inflation, they are unable to connect the two. They do not consider the maintenance or protection of purchasing power to be a form of capital safety. They merely consider capital safety and return to be the same thing. This is one of the reasons why extremely low post-tax fixed deposits and savings accounts have a tonne of long-term money in them (the official amount is simply mind-boggling).
While we cannot fully negate the effects of inflation there are certain things that we can do to combat the effects of inflation and gatekeep our hard-earned incomes. Here are 7 simple ways in which you can combat inflation.
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7 Ways to Combat Inflation:
- Planning your expenses:
Households must keep tight control on their spending during periods of high inflation. Spending mindlessly should be minimised. To ensure that saving, investing, and spending coexists peacefully, funds should be allocated in advance for a variety of reasons. To maximise the utility of smaller amounts, try to operate on the lower part of your budget.
- Investing in Equities:
Despite being seen as volatile and known as the “Satta bazaar” in our nation, investing in equities is thought to be one of the best strategies to guard against inflation. Direct investments, as well as equity mutual funds, are also options. In contrast to banks, where interest rates on deposits are frequently significantly lower than the inflation rate that is typical in the economy, equity instruments offer greater risk-adjusted returns.
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- Know Your Inflation Rate:
As consumption habits vary from household to household, personal inflation rates may change from one person to the next. It is therefore vital to compute your inflation rate while also taking into account the inflation rate for the various commodities you use. You will gain a better understanding of how to manage the funds by keeping an eye on the costs and understanding how you are directly impacted by inflation.
- Investment In Gold:
Investment in gold is regarded as a traditional, reliable inflation hedge and is a constant fixture at weddings, festivals, and other events. Despite not being widely held in physical form, Gold ETSs are becoming more and more popular in portfolios as a profitable investment. Having a gold exposure keeps the portfolio safe and helps to offset the consequences of underperforming investments when the market is in a bear period.
- Floating Rate Bonds:
The biggest threat to the bond is inflation, which has the potential to reduce the purchasing value of any future cash flows that result from the bond. However, in contrast to fixed-rate bonds, floating-rate bonds offer a variable rate that changes from time to time. A spread of 35 basis points is provided above the current NSC rate in the RBI’s floating rate interest bond, which offers an interest rate of 7.15%. This rate is the highest one available for investing when compared to band FDs or fixed-rated bonds, and it is higher than the widely used CPI.
- Review Your Budget:
It is imperative to go over your budget from time to time. Keep a track of your expenses and incomes periodically will help you to understand if you need to have certain adjustments to your budget.
- Look Out for Discounts:
One way of combating inflation is to avoid buying goods such as electronics, or furniture at high prices. You should always look out for genuine buyers who provide reasonable discounts on the purchase. This would ensure that you get quality items at a cost that doesn’t burden your pockets.
After reading the above information one thing is clear you need to cater to the rising inflation levels in your financial planning to fulfil all your dreams and goals within your desired budget. Inflation will not go away one day; its intensity might fluctuate with time but we need to understand ways in which we can safeguard our hard-earned money and live a life of comfort and luxury. As the famous author, Venita VanCaspel ‘Inflation takes from the ignorant and gives to the well informed.’
It is then up to you to stay ignored or informed!
(Saarthi for your dreams)